Are You Ready for Recession?

February 25, 2008

Drycleaners are experiencing what may be the worst time in the history of the industry. Economists are predicting that the U.S. is either in a recession or at the start of one.
Orders for durable goods are down, the dollar is at a new low, home foreclosures are rising fast, and fuel costs are going up with no end in sight. New home construction is at its lowest in 27 years. Business in the future is going to be bleak, the experts say. All I can say is, “Welcome to the world of drycleaning.”
For better or worse, this is our industry. We’ve seen escalating costs for years. We’ve seen declining demand for years. And we’ve seen suppliers move offshore to keep products affordable for years. It’s like a microcosm of American economics.
Take the industry’s recent past and pile the downward pressures of the world economy on top of it, what can possibly make things worse? Now, they say, the good times are over, and business is going to get tough. What are you going to do? What can you do?
Unfortunately for some, it’s too late. In many cases, ongoing efforts to cut costs have cut into the “muscle” of the business, and there’s nothing left. These operations can just wait until whatever’s left atrophies away.
Your perspective will make the difference in your chances of survival, growth and success. The first issue is your self-perspective. The question I ask everyone is, “Are you a drycleaner, or are you a businessperson?”
Those answering “drycleaner” can stop reading now and find themselves a good resume-writer. Those who are businesspeople first and just happen to be drycleaners, however, have the best chance to survive or even flourish through the upcoming challenges.
For those who think that the best way to survive and grow is by cutting costs further, there are only so many costs you can cut. You must have a business to be in business, and it is impossible to have a business and no costs.
Businesses incur costs in order to generate revenues that exceed those costs and produce a positive return, thus rewarding the person taking the risk in the first place. The world is full of people who spend their entire lives without incurring business costs — they’re called employees.
You, the owner, have chosen a different path. Most owners have learned the art of cost containment. Cutting waste is natural to anyone who has been in business for any amount of time. New and better cost-cutting measures are always welcome, of course.
There are limits to cost-cutting methods, though. If you find a way to cut costs 5% and revenue drops 10% as a result, there’s no benefit in the savings.
No business has ever cut costs to greatness. So what can you do? My answer is to use return on investment (ROI) as the rule. With ROI, you can determine which option is in the best interests of the company: The higher the ROI, the better the choice.
With cost-cutting reaching its limits, the competition getting desperate and customers cutting back, the only choice for you is to improve efficiencies. For example, say you are going to hire one of two applicants for a mark-in job. Both are nice, both would fit in, and both are punctual.
One can properly enter and tag 20 pieces an hour and accepted an offer of $8.50 per hour. The other has lots of experience and can tag 35 pieces per hour, but won’t work for less than $11.00 an hour. Who would you hire? If you like them equally well, you should make your choice based on ROI. The answer it provides will leave no question as to which person is the better one to hire.
Basing your decision on cost per piece, the first person has a cost of $8.50/20 pieces, or $0.425 per piece. The second candidate has a cost of $11.00/35 pieces, or $0.314 per piece. Surprise! The more expensive hire has a lower cost per hour and offers higher ROI; you hire that person.
For the person who wants to hire the $8.50-per-hour employee because they’re cheaper, that employee will have to mark in 26.7 pieces per hour to be more cost-effective than the $11.00-per-hour person. Perhaps you can get them to do this over time, but until you do, you’ll sacrifice ROI.
Now, let’s say you have the option of buying a new van, at a great price, with better gas mileage, or you can get a great deal on a new pants press. Which is the better choice? Either one will add to your business’ efficiency and save money over time.
In this situation, you figure that the van will save about $.35 per mile, and your driver averages 150 miles per day. Your expected savings for each day is $52.50. The monthly payment is $375; driving it five days a week four weeks a month, your net savings on $375 a month is $33.75 a day.
The press issue is similar. In a five-day week, you can increase throughput with the new unit and decrease the hours needed to press pants by eight hours a week. The average wage you pay a presser is about $13.00 per hour, and the new press will save $104 a week. The cost of the press is $200 a month.
To compare separate options, the first step is to get them to the same criteria. You can’t compare weekly results with daily results, nor can you compare a week’s savings to daily savings. Use a common time period; since your payments for both options would be monthly, you might as well use a monthly timetable to assess the benefits.
For the van, a daily benefit of $33.75 times five days times four weeks, equals total improved efficiencies of $675, or $300 after paying the monthly note. The weekly savings is $104 times 4, or $416 per month, or $216 after your $200 payment. Which option is the best? The van, right? It offers a $300-per-month efficiency.
The problem is that the van costs almost twice what the press costs. We now need to complete this exercise to reach an actual ROI calculation—a ratio of cost to benefit.
The van’s ROI is $375/675, or 1.80. An investment in the van will return 180% of its cost. (For an option to be considered, it must make at least 100%; “1.0” is the break-even point. Anything less, and you’re losing money on the “improvement.”)
The monthly benefit from the press is $216, and it costs $200 per month. Its ROI is 1.08, or 108%. The press will add to profitability, but the van adds more—for every dollar you spend on it, you get $1.80 back.
The biggest surprise for most cleaners is that the activity with the highest ROI often doesn’t occur in the plant. A good marketing program can offer an ROI of 200% or more. That means your plant will get all of the money you spend on operating the program back, and pocket an equal amount in profits.
I know of no capital investment that comes close to delivering that kind of return. In the case of a new machine, it can take years to reach the break-even point; with marketing, it can be measured in months.
Marketing firms will promise great returns. One might say, “I can increase business 300%;” another will say, “I’ll double your money.” I’m in the business, and I’m not sure what those claims mean. You can make the numbers show anything you want.
Next month, I’ll review several marketing plans and show you a relatively simple spreadsheet you can use to determine the real effect some of these offers. By measuring the ROI of a marketer’s claims, you will be able to find the company or methodology that’s the best solution for your business.
I’ve said this before, but it bears repeating: The future of drycleaning is no longer inside the plant. It’s in the customers.